MESSAGE FROM THE RESEARCH FOUNDATION CHAIR
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MESSAGE FROM THE RESEARCH
FOUNDATION CHAIR
Joanne M. Hill
Chair
CFA Institute Research Foundation
For more than 50 years, CFA Institute been our active partner, with leadership
Research Foundation has endeavored to from Research Head Rhodri Preece as well
educate investment professionals by provid- as valuable production and marketing assis-
ing independent, high-quality research that tance, allowing us to raise awareness of our
helps them effectively fulfill their duties. content. In the challenging year of 2020, we
I assumed my new role as chair in September moved in new directions while continuing
2020, and my highest priority in this letter our focus on delivering research about cur-
is to thank all of you who have contributed rent topics in financial markets and asset
financial support for this mission. Many of management to members and the investing
you have regularly included these contribu- public free of charge. This part of our mis-
tions with your annual CFA Institute mem- sion became even more important as invest-
bership renewal, sustaining the ability of ment professionals shifted to a virtual world
the Research Foundation to provide topical and needed ways to stay current on key and
content in the form of books, shorter arti- evolving topics in the investment industry
cles or “Briefs,” literature reviews, webinars, and financial markets.
and workshops. In 2020, our content cov-
ered a wide range of topics: exchange-traded Our most prominent new initiative in the
funds, retirement, artificial intelligence, ESG past year was launching the Investment Data
investing, several topics related to risk, and Alliance, which enabled us to make US asset
a publication in which leading academics class return data available to CFA Institute
celebrate Nobel Laureate Robert Merton’s members. The catalyst came with the pub-
impact on financial economics. lication of the 2020 Summary Edition of
Stocks, Bonds, Bills, and Inflation® (SBBI®).
In addition to authoring a book on ETFs In partnership with Morningstar and Duff
for the organization, I have had the plea- & Phelps, we were able to combine the pub-
sure of serving as head of the Research lication of the latest edition with access to
Foundation board’s Research Committee these historical data, along with monthly
for several years. These roles have enabled updates, by making this information avail-
me to observe the hard work and dedica- able through the CFA Institute website. (The
tion of our volunteer board members and included data cover US large-cap stocks,
our small staff as they strive to carry out small-cap stocks, corporate bonds, govern-
our mission for the benefit of our members ment bonds of various maturities, and infla-
and the investing public. CFA Institute has tion from January 1926 to the present.)
© 2021 CFA Institute Research Foundation. All rights reserved. 1Message from the Research Foundation Chair
The publication of Stocks, Bonds, Bills, 2020, concern focused on the economic
and Inflation: The Past (1926–1976) and impact and uncertainty of the pandemic,
the Future (1977–2000) in 1977 by Roger making O’Hara and Bhattacharya’s analy-
Ibbotson and Rex Sinquefield was a mile- sis even more relevant. In a CFA Institute
stone for the Research Foundation, and new webinar held in June, O’Hara assessed how
editions were published annually for many ETFs weathered the storm of volatility ear-
years. When I was a young professor and lier in the year.
later a Wall Street research head, access
to these data was critical for me to try to Other publications released in 2020 also
answer so many questions about long-term proved timely. The Research Foundation
return, risk, and correlation characteristics brief “Learning about Risk Management:
of asset classes. Recently, Roger Ibbotson, Insights from Unconventional Risk-Takers”
who is now a CFA Institute Research drew lessons from surprising sources, such
Foundation emeritus board member, offered as surfers and gamblers. The literature review
to help connect us with Morningstar, where Artificial Intelligence in Asset Management
the data had resided for some time, and he examined how the growing use of artificial
worked with Executive Director Bud Haslett intelligence in asset management has led to
to spearhead this special project. Access to improvements and new challenges. Another
the dataset has been very well received by literature review, ESG and Responsible
CFA Institute members, and the Research Institutional Investing Around the World: A
Foundation looks forward to providing Critical Review, addressed an evolving area
more access through the Investment Data of great interest to CFA Institute members.
Alliance in the future.
With support from your donations, CFA
As CFA Institute events switched to a vir- Institute Research Foundation will continue
tual model because of the global pandemic, to provide quality research and data access
CFA Institute Research Foundation adapted to help investors deal with dynamic finan-
by using social media to highlight the rel- cial markets and improve investment deci-
evance and availability of our content and sion making. We are proud that much of our
also by showcasing our authors at webinars content makes its way into CFA Program
sponsored by CFA Institute. The Research curriculum topics, provides a forum to edu-
Foundation brief “ETFs and Systemic Risk,” cate on emerging areas of investing, and
by Maureen O’Hara and Ayan Bhattacharya, creates an important channel for academics
two leading academic scholars in the area of and practitioners to share their knowledge
market microstructure, was a good exam- with all investors.
ple of how salient our content became.
Released in January 2020, this publication Finally, I want to thank the board and staff
takes a close look at research on the impact of CFA Institute Research Foundation and
of ETFs on financial markets and provides CFA Institute for their help in producing
insights on regulatory risks associated with this leading-edge research and express my
the growing use of ETFs as investing and gratitude to all the CFA Institute members
trading vehicles. When the pandemic dis- who have generously contributed financial
rupted markets in February and March support.
2 Research Foundation Review 2021EXECUTIVE DIRECTOR’S REPORT
Bud Haslett, CFA
Executive Director
CFA Institute Research Foundation
In a year of unprecedented challenges, CFA important for developing high-quality con-
Institute Research Foundation adapted and tent. Both meetings were held virtually for
continued to move forward with achieving the first time. Although the personal touch
our mission. From using virtual models to of face-to-face interaction was missing, the
deliver content to enabling access to valu- meetings were productive and efficient. We
able investment data, we strove to deliver now have a model to follow should similar
timely research and resources to help disruptions occur in the future.
investment professionals.
As executive director, I always enjoy pro-
With the pandemic making in-person viding complimentary printed Research
events impossible, we found other ways to Foundation publications to CFA Institute
deliver content. In collaboration with CFA local societies and other venues to be dis-
Institute, we held virtual author webinars tributed to attendees of various events. In
throughout the year. These efforts included the absence of in-person events, however,
Maureen O’Hara discussing her Research the Research Foundation decided midyear
Foundation brief about exchange-traded to pause printing publications. Even though
funds (ETFs) and their influence on sys- printing will resume when events start
temic risks; Pedro Matos elaborating on again, we have initiated an environmentally
his literature review of academic research sensitive “digital first” philosophy for our
on environmental, social, and governance publications that will carry us forward in
(ESG) investing; Elroy Dimson reviewing the future.
his Research Foundation book on finan-
cial market history; and Joachim Klement This year was also remarkable for a reason
expanding on his forthcoming Research that had nothing to do with the pandemic.
Foundation book, Geo-Economics: The The informative Stocks, Bonds, Bills, and
Interplay between Geopolitics, Economics, Inflation® (SBBI®): 2020 Summary Edition
and Investments. These events ranked and SBBI dataset returned to the Research
among the most widely viewed of the CFA Foundation after a 35-year absence. This
Institute webinars. Nevertheless, we look reunion was made possible through a part-
forward to supporting in-person events for nership between the Research Foundation
local societies in the future. and two leading investment information
providers, Morningstar and Duff & Phelps.
The virus also changed the process for
our two board meetings, which are nor- Looking ahead, we anticipate publishing the
mally held in person because they are so 2021 Summary Edition of the International
© 2021 CFA Institute Research Foundation. All rights reserved. 3Executive Director’s Report
Guide to Cost of Capital (IGCC), which can Additional plans for 2021 include a special
be used to estimate country-level cost of 25th anniversary celebration of the Vertin
equity capital globally, for more than 180 Award as well as the 20th anniversary of the
countries. This useful publication is based popular Equity Risk Premium Symposium.
on the methodology highlighted in the 1998 We are also working to publish translations
Research Foundation publication on coun- for much of our content.
try credit risk.
As always, we thank CFA Institute for its
In the future, we hope to add more datasets generous support of CFA Institute Research
and publications to what we are calling the Foundation, which is particularly impor-
Investment Data Alliance, which includes tant during these trying times. We would
SBBI and IGCC. Our goal is to provide also like to thank the tens of thousands of
valuable information for members of the donors who have supported our mission
investment community to help them excel over the past half century of our existence.
at their jobs and better serve their clients. We pledge to continue publishing high-
The plan for a board meeting scheduled for quality independent research to assist the
November 2021 in Chicago includes the investment professional, and we look for-
formal launch event of the Investment Data ward to serving you in the future.
Alliance with CFA Society Chicago and our
partners at Morningstar and Duff & Phelps.
4 Research Foundation Review 2021RESEARCH DIRECTORS’ REPORT
Luis Garcia-Feijóo, CFA, CIPM
Associate Research Director
CFA Institute Research Foundation
Laurence B. Siegel
Gary P. Brinson Director of Research
CFA Institute Research Foundation
Managing risk turned out to be a theme expenses and finds problems, especially in
for the past year. Fittingly, CFA Institute the United States.
Research Foundation published a number of
works related to risk management in a num- In “ETFs and Systemic Risks,” Maureen
ber of ways. These include retirement risk, O’Hara and Ayan Bhattacharya review
personal risk, systemic risk, and the mother existing evidence on whether exchange-
of all investment-related risks—that of fluc- traded funds make financial markets more
tuations in asset values. vulnerable to liquidity shocks, increasing
instability. They highlight areas of concern
The risk of falling short of one’s income and provide expert recommendations for
needs in retirement is one that almost every- regulators.
one feels personally. In a monograph titled
Is There a Retirement Crisis? An Exploration A different type of risk that may be closer
of the Current Debate, George A. (Sandy) to the typical investor’s experience is the
Mackenzie evaluates the amount of shortfall classic sense of volatility. Matthew T. Moran
risk in the retirement system in the United and Berlinda Liu describe and analyze vol-
States and other countries, based on a meta- atility-based products in “The VIX Index
analysis of industry and academic studies. and Volatility-Based Global Indexes and
Although “researchers offer a wide range Trading Instruments.” Although the first
of forecasts, with some warning of a severe VIX Index was created in 1993, the widely
crisis and others being more skeptical about followed futures and options instruments
the likely scale of the problem,” Mackenzie were launched more recently in 2004 and
concludes that those warning of a crisis are 2006. The authors explain the risks and pos-
closer to the truth. Although many people sible benefits of investing in the VIX family
are well prepared for retirement, an alarm- of products.
ing number of people are not. Mackenzie
also documents preparedness for health In an extraordinarily productive career, MIT
professor Robert C. Merton, 1997 Nobel
© 2021 CFA Institute Research Foundation. All rights reserved. 5Research Directors’ Report
Prize winner in economics, has changed the analysis covers the past and present of ESG
way investors think about option pricing, investing, as well as open research questions
life-cycle financial decisions, continuous- about the actual impact for society.
time finance, and many other important
topics. A festschrift was organized by MIT New technologies always present potential
and Dimensional Fund Advisors to cel- risks in addition to their advantages, and
ebrate Merton’s 75th birthday, and many artificial intelligence is no different. In the
of his most influential colleagues and stu- literature review Artificial Intelligence in
dents presented papers and speeches that Asset Management, Söhnke Bartram, Jürgen
are collected in the CFA Institute Research Branke, and Mehrshad Motahari explain
Foundation brief “Robert C. Merton and the applications of artificial intelligence (AI) to
Science of Finance: A Collection.” portfolio management (including improved
fundamental analysis through textual analy-
Allison Schrager’s brief, “Learning about Risk sis, more accurate parameter estimation,
Management: Insights from Unconventional and better asset allocation), trading (algo-
Risk-Takers,” involves a novel and creative rithmic trading, cost analysis, improved
take on risk. She profiles three individual execution), and risk management. They also
risk-takers in detail. Labeling Hollywood as cover robo-advisers, which are receiving
“the land of broken risk models,” Schrager increasing attention. Furthermore, a unique
describes the efforts of Hollywood mogul aspect of the review is that the authors
Ryan Kavanaugh to develop a new econom- include a description of common AI con-
ics of movies that takes into account the cepts and tools, so the reader does not need
unpredictable environment that moviemak- to already be familiar with them to evaluate
ers face. She also chronicles poker cham- the asset management implications.
pion Phil Hellmuth, a temperamental player
who is nevertheless one of the best in the Finally, in 2020, CFA Institute Research
world and whose example shows how “we Foundation resumed publishing a founda-
can overcome our biases when it matters.” tional work in the study of investment risk
Finally, Schrager reports on a risk conference management. Originally produced in 1976
in Hawaii for big-wave surfers, one of the by Roger G. Ibbotson and Rex A. Sinquefield
world’s most dangerous sports, noting that (and later by Ibbotson Associates), Stocks,
the conscious management of risk is what Bonds, Bills, and Inflation (SBBI) compiles
makes big-wave surfing possible as an ongo- historical returns for most of the major
ing activity. US asset classes. CFA Institute Research
Foundation has a long history with this
For many investors, particularly institutional project, having first published SBBI in 1977,
ones, environmental, social, and governance and it was especially gratifying to make the
(ESG) investing is also a risk-management SBBI dataset and the book Stocks, Bonds,
decision. Pedro Matos reviews academic Bills, and Inflation® (SBBI®): 2020 Summary
research on ESG investing from an interna- Edition available to all CFA Institute
tional perspective, emphasizing the role of members free of charge. Many thanks
institutional investors, in his literature review, to Morningstar, Duff & Phelps, Roger
ESG and Responsible Institutional Investing Ibbotson, and James Harrington for their
around the World: A Critical Review. His help on these projects.
6 Research Foundation Review 2021Research Directors’ Report The Ibbotson–Sinquefield work is best for a long time, Ibbotson and Sinquefield known for documenting the historical were the first to apply this technology to returns on these key asset classes and pro- investment returns, revolutionizing finan- jecting their returns into the future, but the cial planning and asset allocation. authors also measured the variability (risk) of those returns. Their projections of the We look forward to a more peaceful and future include probabilistic forecasts that healthy year, but risks will be with us no mat- acknowledge the riskiness of the future by ter what happens. A deep understanding of incorporating measures of return variabil- risk in all its dimensions is necessary to the ity that has occurred in the past. Whereas practice of investment management, and we weather forecasters have been making prob- will continue to explore it in our work. abilistic forecasts (e.g., a 10% chance of rain) Research Foundation Review 2021 7
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